Higher Inflation, Interest rate increase, why?
Discussion
I would like to think i am reasonably intelligent? I have ran car dealerships, i was a financial adviser years back, However i cant get my head around the latest inflation figure. Can someone explain, why you feel the need to increase interest rates because of the increase in the price of fuel,food,and energy, the 3 main factors for the latest inflation increase.Nearly every one has less disposable income at the moment, not forgeting the new VaT rate. Why would increasing the base rate help? Higher mortgages,variable loans up, credit card repayments up. Surley this would just lead to higher salary demands and pay increases?? Driving inflation higher? A vicious circle IMO.
Please enlighten me.
Please enlighten me.
It's simple monetary policy.
Inflation can be combated with an increase in interest rates. Why? This pretty much means mortgage rates go up which without going into the macroeconomic details means that people buy less. This means that inflation will go down, as inflation is the general increase in price levels.
The general increase in price levels pretty much meaning people are buying more than the economy can provide. By curbing this by taking away their income, you bring down the inflation that the UK is suffering at the moment. I don't think I need to explain that if demand goes down, prices do too.
It's a good thing, and proof that actually nothing is really horrendously wrong.
Inflation can be combated with an increase in interest rates. Why? This pretty much means mortgage rates go up which without going into the macroeconomic details means that people buy less. This means that inflation will go down, as inflation is the general increase in price levels.
The general increase in price levels pretty much meaning people are buying more than the economy can provide. By curbing this by taking away their income, you bring down the inflation that the UK is suffering at the moment. I don't think I need to explain that if demand goes down, prices do too.
It's a good thing, and proof that actually nothing is really horrendously wrong.
Edited by F93 on Tuesday 18th January 18:48
A higher interest rate lowers inflation as people don't like borrowing money so much, mortgages and credit cards are more money so you consume less. This is difficult to explain without a diagram.
It also leads to increasing savings which causes increased 'leakage' from the economy so it can cause it to tank.
It's actually a good sign though, as it shows people are well off enough to push prices up. However it also shows how being the worlds most globalized country does have drawbacks (cue right-wing maniacs blaming everything on China). Fuel is very expensive but that is because there is too much traffic, so lowering it will mean more congestion, raising it will damage the economy. That's why labour avoided doing anything with it and why the tories are a little silent on it.
It also leads to increasing savings which causes increased 'leakage' from the economy so it can cause it to tank.
It's actually a good sign though, as it shows people are well off enough to push prices up. However it also shows how being the worlds most globalized country does have drawbacks (cue right-wing maniacs blaming everything on China). Fuel is very expensive but that is because there is too much traffic, so lowering it will mean more congestion, raising it will damage the economy. That's why labour avoided doing anything with it and why the tories are a little silent on it.
Edited by F93 on Tuesday 18th January 19:00
I was under the impression that the underlying rate of inflation was in line with the Bank of Englands predictions? The latest cost increase of fuel/food/ energy has driven up inflation.Demand for these items will not decrease significantly to lower inflation with a rate increase. I`m still confused!
it won't have that great an affect, but it will curb it somewhat. If 60 million people all decide to buy a little less fuel/food and such then it's undoubtedly gonna have some effect.
The main pressure on inflation is out of our control which is that fuel prices show themselves in everything. Food is getting more expensive anyway but on top of that is fuel increases too, which is why as the world recovers from the recession (which is a good thing) it gets more and more stuff thus pushing prices up for us here. Fuel is the main reason for inflation here generally though.
The main pressure on inflation is out of our control which is that fuel prices show themselves in everything. Food is getting more expensive anyway but on top of that is fuel increases too, which is why as the world recovers from the recession (which is a good thing) it gets more and more stuff thus pushing prices up for us here. Fuel is the main reason for inflation here generally though.
F93 said:
Fuel is very expensive but that is because there is too much traffic, so lowering it will mean more congestion, raising it will damage the economy. That's why labour avoided doing anything with it and why the tories are a little silent on it.
Apologies, but that is complete b
ks. It is expensive because a huge percentage of the price we pay at the pump is tax. 
Muntu said:
F93 said:
Fuel is very expensive but that is because there is too much traffic, so lowering it will mean more congestion, raising it will damage the economy. That's why labour avoided doing anything with it and why the tories are a little silent on it.
Apologies, but that is complete bks. It is expensive because a huge percentage of the price we pay at the pump is tax. F93 said:
Muntu said:
F93 said:
Fuel is very expensive but that is because there is too much traffic, so lowering it will mean more congestion, raising it will damage the economy. That's why labour avoided doing anything with it and why the tories are a little silent on it.
Apologies, but that is complete bks. It is expensive because a huge percentage of the price we pay at the pump is tax. 
The tax is there to raise revenue to pay for some of the government's excesses, (welfare state, foreign aid, outreach workers etc) it isn't in place to keep people off the roads. If petrol had no tax on it, I would imagine that more of us would be driving V8s rather than there being more people on the roads.
The price of fuel just isn't enough of a barrier to the car ownership market at present. £4/litre probably wouldnt be either, given the alternatives available for getting to and from work every day for many people.
Exactly, tax isn't enough of a barrier. But if there was no duty people would drive more, which is why the volume of traffic would increase more than number of cars, which is what I was trying to say. For example less people would use the train and such, probably. But this is because demand for cars in price inelastic, hence no matter how high or low the price is a very large amount of people still want to use cars. However I think they recently found traffic volume was decreasing slightly, mainly due to high prices.
But fuel duty increases with inflation, hence I don't think it's counted when working out inflation. However it's always high, and thus inflation goes up because it won't go down.
And true, fuel duty is essentially a failure at reducing traffic, which is why Labour wanted to (in an odd phase of thinking properly) introduce road pricing.
But fuel duty increases with inflation, hence I don't think it's counted when working out inflation. However it's always high, and thus inflation goes up because it won't go down.
And true, fuel duty is essentially a failure at reducing traffic, which is why Labour wanted to (in an odd phase of thinking properly) introduce road pricing.
Muntu said:
F93 said:
Stuff.
We will have to agree to differ, I still do not see that "Fuel is very expensive but that is because there is too much traffic", as you put it.
Higher interest rates cause greater demand for the Pound because investors can get a greater return.
Supply and demand pushes up the value of the currency. The net result is a stronger currency, lower inflation and greater purchasing power for everyone in the UK.
Interest rates need to go up to tip the balance back in favour of savers and investors and away from irresponsible speculators, borrowers and bankers.
Supply and demand pushes up the value of the currency. The net result is a stronger currency, lower inflation and greater purchasing power for everyone in the UK.
Interest rates need to go up to tip the balance back in favour of savers and investors and away from irresponsible speculators, borrowers and bankers.
UK interest rates are not going to influence the global prices of wheat, oil or any other traded commodities. Interest rates are no longer a valid lever with which to control inflation.
Should they go up, then the pound will strengthen, the price of imported electronic goods and other such fripperies will drop, but the basic cost of living will continue to march upwards - and exports will fall over.
Best solution for our collective debt is to inflate it away. If that hurts the value of your accumulated savings then do something more constructive than just sitting on them.
Should they go up, then the pound will strengthen, the price of imported electronic goods and other such fripperies will drop, but the basic cost of living will continue to march upwards - and exports will fall over.
Best solution for our collective debt is to inflate it away. If that hurts the value of your accumulated savings then do something more constructive than just sitting on them.
Muntu said:
I would think that everyone who wants to drive, does drive. Do you, or anybody else for that matter, know of anybody who doesn't drive because petrol is 129p/litre? Thought not
Yes I do, my car is laid up most of the month, I only drive when I have to and minimise the number of unnecessary journeysMuntu said:
The tax is there to raise revenue to pay for some of the government's excesses, (welfare state, foreign aid, outreach workers etc) it isn't in place to keep people off the roads. If petrol had no tax on it, I would imagine that more of us would be driving V8s rather than there being more people on the roads.
The price of fuel just isn't enough of a barrier to the car ownership market at present. £4/litre probably wouldnt be either, given the alternatives available for getting to and from work every day for many people.
What alternatives outside of London public transport is sThe price of fuel just isn't enough of a barrier to the car ownership market at present. £4/litre probably wouldnt be either, given the alternatives available for getting to and from work every day for many people.
t in Birmingham to get round the city by train you need to go into the centre then back out. Most low paid jobs are in estates on the outskirts of towns that are inaccessible at the start of a shift by public transport. Add in that peoples ability to move house has been hit by the economic climate and some people have to drive or cycle to work as any other way there isn't feasible if fuel prices go too high then shelf stackers, service station workers etc. will possiby end up being better off on the dole.Edited by Engineer1 on Tuesday 18th January 20:54
Nick_F said:
UK interest rates are not going to influence the global prices of wheat, oil or any other traded commodities. Interest rates are no longer a valid lever with which to control inflation.
Should they go up, then the pound will strengthen, the price of imported electronic goods and other such fripperies will drop, but the basic cost of living will continue to march upwards - and exports will fall over.
Best solution for our collective debt is to inflate it away. If that hurts the value of your accumulated savings then do something more constructive than just sitting on them.
yes and no, inflating away the debt will not work that easily. The problem will be that workers will ask for larger pay increases and don't forget inflation also applies to things factories use to make products and all the consumables and energy used in offices.Should they go up, then the pound will strengthen, the price of imported electronic goods and other such fripperies will drop, but the basic cost of living will continue to march upwards - and exports will fall over.
Best solution for our collective debt is to inflate it away. If that hurts the value of your accumulated savings then do something more constructive than just sitting on them.
This will increase our costs making us less competitive leading to unemployment and even more govt debt.
As for inflation, it has very little to do with UK demand and a lot to do with demand in China and India.
We are not in control of our own destiny. We should start working a lot harder for a lot less so that we as a nation start paying our way. But I don't think the country knows how to, we are too obsessed with property and BTL.
Nick_F said:
UK interest rates are not going to influence the global prices of wheat, oil or any other traded commodities. Interest rates are no longer a valid lever with which to control inflation.
Should they go up, then the pound will strengthen, the price of imported electronic goods and other such fripperies will drop, but the basic cost of living will continue to march upwards - and exports will fall over.
If the pound strengthens, the real prices paid for wheat, oil and so on will also fall as they're denominated in dollars. Should they go up, then the pound will strengthen, the price of imported electronic goods and other such fripperies will drop, but the basic cost of living will continue to march upwards - and exports will fall over.
ZondaMark said:
Nick_F said:
UK interest rates are not going to influence the global prices of wheat, oil or any other traded commodities. Interest rates are no longer a valid lever with which to control inflation.
Should they go up, then the pound will strengthen, the price of imported electronic goods and other such fripperies will drop, but the basic cost of living will continue to march upwards - and exports will fall over.
If the pound strengthens, the real prices paid for wheat, oil and so on will also fall as they're denominated in dollars. Should they go up, then the pound will strengthen, the price of imported electronic goods and other such fripperies will drop, but the basic cost of living will continue to march upwards - and exports will fall over.
But it is an interesting concept.
As I said though, I don't think the inflation is caused by UK demand.
F93 said:
Fuel is very expensive but that is because there is too much traffic, so lowering it will mean more congestion, raising it will damage the economy. That's why labour avoided doing anything with it and why the tories are a little silent on it.
You're looking way too small-fry, unless you mean traffic more figuratively and on a global level.Commodities have become more expensive ultimately because supply lines have failed to keep pace with demand from the emerging economies (and eco-policies aimed at the agricultural ones), adding as many as 2bn people to the global queue. Petrol duty then adds a bunch, and VAT compunds it by amplifying any rises in other components of the price (being a %age, not a set amount). The tax is there as the demand for fuel is so price inelastic, not to regulate traffic (most people who can drive, do), so provides a massive, pretty stable, cash cow for the gov't coffers.
Gassing Station | News, Politics & Economics | Top of Page | What's New | My Stuff